Passive Insights: How index ETFs and index funds grew in Q4FY24

30 Apr 2024 , 10:14 AM

Q4FY24 SHOWED SUBDUED INTEREST IN PASSIVE FUNDS

If the previous December 2024 quarter was a quarter of easy pickings in active funds, the quarter to March 2024 was a case of the trend repeating itself. Most investors still preferred to hunt for alpha in the actively managed funds, rather than stay content with beta offered by these passive funds. Despite the SEBI restrictions on small and mid-cap stocks, most of these active category of funds did extremely well in the quarter to Mach 2024, which led to sustained interest in these active funds over passive funds. One important point here is that the March 2024 quarter saw the Nifty giving just 2.74% returns, compared to 20% in the December 2023 quarter. However, the spillover effects of active funds outperforming passive funds in December quarter appeared to continue in the March 2024 quarter also.

However, the one reality we cannot overlook is that the Sensex, which is the benchmark of the BSE, has returned 16.5% on a CAGR basis over the last 45 years. That is excluding dividends. If you add the dividend yield of 1.3% on an average, we are looking at 17.8% CAGR returns generated by the Sensex over 45 years. Remember, we are looking at an index and we are looking at a very long time. If a generic index can give such incredible returns over such a long period of time on a sustained basis, then index investing is really not going away in a hurry. In fact, in most of the other countries, index investing is the bulk of retail investing and it is only in India that we find such a massive army of retail investors literally trying to make short term returns in equities, futures and options. Let us now turn to how index ETFs and index funds performed in the latest quarter.

INDEX ETF QUARTERLY PROGRESS – MARCH 2024

Today, passive investment through index ETFs and index funds has become a significant part of overall mutual fund AUM, albeit globally quite small. The table captures the gist of growth in index ETF AUM over the last few years. These are cumulative numbers

Period FY Reference	Equity ETF (₹ in Crore)	Debt ETF (₹ in Crore)	Gold ETF (₹ in Crore)	Silver ETF (₹ in Crore)	Total ETF (₹ in Crore)
Upto Mar-17	43,234	1,497	5,480	–	50,211
Upto Mar-18	71,841	2,017	4,806	–	78,664
Upto Mar-19	1,32,687	2,278	4,447	–	1,39,412
Upto Mar-20	1,29,751	16,640	7,949	–	1,54,340
Upto Mar-21	2,37,903	37,672	14,123	–	2,89,698
Upto Mar-22	3,49,330	61,256	19,281	777	4,30,644
Upto Mar-23	3,97,082	85,406	22,737	1,792	5,07,017
Upto Mar-24 #	5,63,176	96,163	31,224	4,642	6,95,205

Data Source: NSE (# refers to full 12 months of fiscal year 2023-24)

With full fiscal year data now available for FY24 also, here are some key takeaways from the ETF growth story for the latest quarter ended March 2024, with a historical perspective.

• The numbers say it all. The AUM of index ETFs has grown from ₹50,211 Crore in FY17 to ₹6,95,205 Crore as of March 2024. That is a 13.85X growth in 6 years flat. One can argue that a good chunk of this accretion is from the Nifty and the Sensex more than doubling in this period; and that is true. However, a 13.85X growth still implies that fresh flows into these index ETFs have been robust in this period.
• While ETF AUMs are largely dominated by the equity ETFs, debt ETFs are also catching up. Gold and silver ETFs are relatively smaller and also more recent. However, the bigger story is the frenetic growth post the pandemic . Between March 2020 and December 2023, the overall AUM of ETFs has grown from ₹1.54 Trillion to ₹6.95 Trillion, which is a 4.5X growth. The growth was robust across equity index ETFs, debt index ETFs and gold ETFs. In fact, even the AUM of debt ETFs are up nearly 6-fold post the pandemic.
• As of December 2023 close, there were a total of 206 index ETFs in India, which comprised of 150 equity index ETFs, 28 debt index ETFs, 17 gold ETFs and 11 silver ETFs. There are a total of 71 different indices being tracked by index ETFs, which include 57 equity indices and 14 debt indices.
• What about the folios? Index ETFs alone have 128.24 Lakh folios. Out of these individual retail investors account for 125.11 Lakh folios or 98% of the total folios while the HNI investors account for 2.48 Lakh folios or nearly 2%. The folios share of FPIs, banks and corporates are actually quite insignificant.
• However, the story entirely changes if one were to look at the AUM share of the various stake holders in index ETFs. Out of the total ETF AUM, corporates account for a whopping 91% of the overall index ETF AUM, HNIs account for 7%, Retail investors account for just 2% of the AUM, while banks and FPIs have negligible AUM.

The growth of index ETFs over the last 7 years has been robust. Even considering the massive rally in the equity indices in the last couple of quarter, index ETF flows have continued to be strong, indicating that there is a niche market for such passive products.

INDEX FUNDS QUARTERLY PROGRESS – MARCH 2024

Unlike index ETFs, the index funds are regular mutual funds that are based on day-end NAVs with repurchase and sale on a continuous basis based on NAV linked prices. Here is a quick dekko at the growth in AUM of index funds between FY17 and FY24.

Period FY Reference	Equity Funds (₹ in Crore)	Debt Funds (₹ in Crore)	Gold Funds (₹ in Crore)	Total Funds (₹ in Crore)
Upto Mar-17	2,452	–	–	2,452
Upto Mar-18	3,061	–	–	3,061
Upto Mar-19	5,237	–	–	5,237
Upto Mar-20	8,056	–	–	8,056
Upto Mar-21	18,107	883	–	18,990
Upto Mar-22	39,638	27,609	–	67,247
Upto Mar-23	55,557	1,05,219	–	1,60,776
Upto Mar-24 #	1,03,577	1,09,995	–	2,13,572

Data Source: NSE (# refers to full 12 months of fiscal year 2023-24)

Here are some key takeaways from the index fund growth story for the latest quarter ended December 2023, with a perspective view of last few full financial years.

• The AUM of index funds has grown from ₹2,452 Crore in FY17 to ₹2,13,572 Crore as of December 2023. That is an 87-fold increase over 7 years, which can be misleading due to the low base. While some part of this accretion came from index appreciation, a good chunk also came from fresh flows. The flows into index funds were not of the same order and magnitude as the flows into index ETFs. Clearly, the listing aspects appears to work in favour of index ETFs, especially for the traders who are already exposed to equities, through trading and demat accounts. Real time prices also help index ETFs.
• In contrast to the ETF story, debt index funds have dominated the market share but equity index funds have caught up sharply in FY24. In fact, the growth in Aum of equity index funds and debt index funds has been fairly rapid post the pandemic crisis of March 2020. The debt index fund story was entirely a post-pandemic phenomenon. One of the things that should work inf favour of index funds is that there is no SEBI restriction on the number of index funds that a particular AMC can have. Also, one can invest in index funds even without having a trading and demat account; which is needed for ETFs.
• As of December 2023 close, there were a total of 207 index funds in India, which comprised of 120 equity index funds, 87 debt index funds. There are a total of 113 different indices being tracked by index funds, which include 40 equity indices and 73 debt indices.
• What about the folios? Index funds alone have 62.83 Lakh folios as of March 2024. Out of these folios, individual retail investors account for 59.37 Lakh folios or 94% of the total folios while the HNI investors account for 3.19 Lakh folios or nearly 5%. The folios share of FPIs, banks and corporates together are quite negligible and add up to less than 1%.
• However, the story entirely changes if one were to look at the AUM share of the various stake holders in index funds. Out of the total index funds AUM, corporates account for a whopping 46% of the overall index fund AUM, HNIs account for 40%, and retail investors account for just 14% of the AUM. The AUM share of banks and FPIs in the total index fund AUM was quite insignificant.

Index funds have not shown the same enthusiasm as they started off with as many investors appear to have gravitated towards index ETFs due to their inherently lower costs and real time price availability. However, debt index funds have been quite popular.

MARCH 2024 UPDATE – FLOWS INTO INDEX ETFS AND INDEX FUNDS

We now take stock of how the flows into index funds and index ETFs panned out over the years in terms of gross flows and net flows; updated till March 2024. Gross flows reflect the interest levels and net flows show the direction of flows. Here are the index ETFs.

Period FY Reference	Mobilizations (₹ in Crore)	Redemptions (₹ in Crore)	Gross Flows (₹ in Crore)	Net Flows (₹ in Crore)
FY 2016-17	41,335	17,281	58,616	24,054
FY 2017-18	58,341	34,383	92,724	23,958
FY 2018-19	1,00,158	56,807	1,56,965	43,351
FY 2019-20	1,23,008	63,198	1,86,206	59,809
FY 2020-21	1,06,512	66,692	1,73,204	39,820
FY 2021-22	1,39,616	58,766	1,98,382	80,850
FY 2022-23	1,56,162	96,635	2,52,797	59,526
FY-2023-24 #	1,53,170	1,10,276	2,63,446	42,894

Data Source: NSE (# refers to 12 months data for full fiscal 2023-24)

What would strike you is not the rather steady net flows, but the rapid spike in the gross flows. The gross flows are the aggregate of inflows and redemptions and that has gone up between FY17 and FY23 by more than 4.5 times. That shows the rising volumes of trading happening in index ETFs, hinting at a surge in investor interest.

Let us now turn to how the flows story look like for the index funds. The data available is for last 5 years including the updated numbers for FY24.

Period FY Reference	Mobilizations (₹ in Crore)	Redemptions (₹ in Crore)	Gross Flows (₹ in Crore)	Net Flows (₹ in Crore)
FY 2019-20	8,222	3,205	11,427	5,017
FY 2020-21	12,880	8,301	21,181	4,579
FY 2021-22	55,920	11,161	67,081	44,759
FY 2022-23	1,26,511	30,840	1,57,351	95,671
FY-2023-24 #	52,950	37,261	90,211	15,689

Data Source: NSE (# refers to 12 months data for full fiscal 2023-24)

Like in the case of index ETFs, even in the case of index funds, the growth has been very frenetic post the pandemic. If you ignore FY24, the one trend is the progressive improvement in the net flows between FY20 and FY23. However, that can be attributed to the higher share of debt index funds in the mix, where the stickiness tends to be higher by default. The overall passive story of index ETFs and index funds, surely looks promising.

ARE WE SEEING THE POST-PANDEMIC TREND SATURATING?

To be fair, the pandemic did make a huge difference to the passive flows due. There were a number of triggers. The investors who stayed on were laughing all the way to the bank. Post pandemic, the index itself has been an outperformer, making a case for passive investing. Increasingly, fund managers are facing the kurtosis problem where the index is being driven by certain stocks, but the MFs cannot capitalize due to exposure limitations. Such challenges were automatically addressed by passive funds. But, is the tide turning?

There are concerns that the trend is saturating, but it looks more like a pause in the passive narrative. Passive funds will have its downside risks at a time when smaller stocks are doing extremely well. Most indices do not cover these stocks, but that is where the alpha is. A few swallows do not a summer make; so, it looks more like a pause for passive funds in this quarter; not exactly any shift in trend. Passive funds are here to stay for a long time.